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Floating 250 million shares next month, new Millenium Company is undergoing its IPO in an industry...

Floating 250 million shares next month, new Millenium Company is undergoing its IPO in an industry where the average P/E ratio for similar firms is 18. It expects to pay steady annual dividends of $1.38 per share in each of the first four years, and projects earnings of $750 million by year 4. Risk-model pricing necessitates a 14% discount rate. Considering the projected cash flows from the firm and the P/E for the industry, what would be your estimate of the price per share that the investment bank should set for the stock's IPO next month?

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Answer #1

EPS = Total Earnings / Total number of shares
EPS = 750 million / 250 million shares
EPS = 3 $ per share
Market price = EPS x PE ratio
Market price = 3 x 18
Market price = 54$ per share
Computation of price per share that the investment bank should set for the stock's IPO next month
Year Particulars Cash flow(a) PV factor @ 14%(b) (a)x(b)
1-4 Dividend 1.38 2.91371230445 4.02092298014   
4 Market price 54 0.59208027735 31.9723349769
= 35.993257957
Price per share that the investment bank should set for the stock's IPO next month = 35.99$ (rounded off to 2 decimals)
Note :
PV factor @ 14% at end of 4th year = 1 / (1+0.14)4 = 0.59208027735
PV factor of annuity factor @ 14% for 4 years = 1 / (1+0.14)1 + 1 / (1+0.14)2 + 1 / (1+0.14)3 + 1 / (1+0.14)4 = 2.91371230445

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